Sub­dued in­vest­ment at root of our na­tion’s re­ces­sion

The Star Early Edition - - OPINION & ANAL­Y­SIS - Jan­nie Ros­souw Jan­nie Ros­souw is the head of the School of Eco­nomic & Busi­ness Sciences, Univer­sity of the Wit­wa­ter­srand. This ar­ti­cle was orig­i­nally pub­lished in The Con­ver­sa­tion. Visit: http:// the­con­ver­sa­

SOUTH Africa has been rocked by news that it has slipped into a re­ces­sion af­ter its gross do­mes­tic prod­uct (GDP) de­clined 0.7 per­cent dur­ing the first quar­ter of 2017 af­ter con­tract­ing by 0.3 per­cent in the fourth quar­ter of 2016. This is what it means. What is a tech­ni­cal re­ces­sion? It’s when an econ­omy suf­fers two con­sec­u­tive quar­ters of neg­a­tive eco­nomic per­for­mance. It refers to shrink­ing eco­nomic out­put, some­times also known as neg­a­tive eco­nomic growth or eco­nomic de­cline.

In short, it im­plies that the eco­nomic ac­tiv­ity of a coun­try is de­clin­ing. In South Africa’s case, it’s par­tic­u­larly se­ri­ous be­cause the coun­try needs strong eco­nomic growth to make in­roads into un­em­ploy­ment, which is at more than 27 per­cent.

South Africa des­per­ately needs a strong econ­omy for other rea­sons. The first is that the liv­ing stan­dards of its ci­ti­zens can’t im­prove with­out eco­nomic growth. The sec­ond is that the econ­omy needs to grow for the gov­ern­ment to in­crease rev­enue to meet its grow­ing so­cial wel­fare bud­get.

There are other ways to de­scribe a re­ces­sion, al­though the tech­ni­cal def­i­ni­tion is one that’s gen­er­ally ac­cepted. Other def­i­ni­tions in­clude “an econ­omy per­form­ing be­low po­ten­tial” or “an in­crease in the out­put gap”.

As an aside, it’s in­ter­est­ing to note that there’s a tech­ni­cal def­i­ni­tion for a re­ces­sion, but no agreed def­i­ni­tion for a de­pres­sion (as in the Great De­pres­sion of the 1930s).

South Africa’s econ­omy showed mar­ginal pos­i­tive growth for 2016, al­though it then con­tracted in the fourth quar­ter of the year. With sim­i­lar con­trac­tion in the first quar­ter of 2017, the coun­try en­tered a tech­ni­cal re­ces­sion.

If the econ­omy shows pos­i­tive growth for the re­main­ing three-quar­ters of this year, South Africa will avert a re­ces­sion for the cal­en­dar year 2017.

What caused it?

Eco­nomic ac­tiv­ity con­tracted over a wide range of sec­tors, in­clud­ing con­struc­tion, man­u­fac­tur­ing and trans­port. Only min­ing and agri­cul­ture made a pos­i­tive con­tri­bu­tion to out­put growth. All other sec­tors con­tracted.

This re­flects sub­dued de­mand through­out the South African econ­omy. The data on the first quar­ter con­firms what many small and medium busi­ness own­ers have been say­ing since the be­gin­ning of 2017 – that de­mand is down and that busi­ness con­di­tions are tough.

The im­por­tant ques­tion is whether this re­ces­sion will con­tinue in the sec­ond quar­ter – April to June, or whether there will be a turn­around to eco­nomic growth.

Who’s to blame?

It’s dif­fi­cult to say who is to blame. But it must be noted that re­ces­sions are rare events, as poli­cies are gen­er­ally aimed at eco­nomic growth.

This is the sec­ond re­ces­sion ex­pe­ri­enced in post-1994 South Africa.

Rapid eco­nomic growth de­pends on in­vest­ment, which is de­pen­dent on con­fi­dence and pos­i­tive expectations of the coun­try’s fu­ture.

Pres­i­dent Ja­cob Zuma’s ad­min­is­tra­tion doesn’t in­stil con­fi­dence. This partly ex­plains sub­dued in­vest­ment.

The re­cent credit risk down­grades into sub-in­vest­ment grade has made South Africa a less at­trac­tive in­vest­ment des­ti­na­tion.

This lack of con­fi­dence is also re­flected in sup­pressed de­mand, which in turn re­sults in con­trac­tions in eco­nomic out­put.

How do we get out of it?

In­vest­ment is re­quired to get South Africa out of its de­pressed eco­nomic con­di­tions. In­vest­ment will boost de­mand in the econ­omy, with pos­i­tive spill-over ef­fects into a num­ber of sec­tors.

Nat­u­rally restor­ing South Africa’s credit risk rat­ing to in­vest­ment grade would help boost in­vest­ment. A bet­ter credit rat­ing would re­duce the risk of in­vest­ing in the coun­try. The up­com­ing credit rat­ing de­ci­sion from global credit rat­ing agency Moody’s is go­ing to be a crit­i­cal mo­ment.

This, af­ter two big rat­ing agen­cies, Fitch Rat­ings and S&P Global Rat­ings, down­graded some of South Africa’s in­stru­ments into sub-in­vest­ment grade.

A down­grade from Moody’s will trig­ger mas­sive cap­i­tal flights which will ex­ert fur­ther pres­sure on the econ­omy.

What com­pany are we keep­ing? Are other coun­tries in the same boat at the mo­ment?

South Africa is join­ing a grow­ing list of coun­tries which have slipped into tech­ni­cal re­ces­sions. These in­clude Ecuador, Equa­to­rial Guinea and Venezuela. It’s im­por­tant to re­mem­ber that a coun­try’s sta­tus can change from quar­ter to quar­ter de­pend­ing on its growth rate.

An as­sess­ment of eco­nomic growth or re­ces­sion sta­tus needs to be made based on the most re­cent data.


The lack of con­fi­dence in Pres­i­dent Ja­cob Zuma’s ad­min­is­tra­tion ex­plains sub­dued in­vest­ment in the South African econ­omy, which has now fallen into a re­ces­sion.

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